Dear All,
I have a basic doubt in calculation Free Cash Flow (for application under DCF). I am of the understanding that to derive free cash flow, Operating Income after taxes needs to be subtracted with Changes in Working Capital (Net Changes in Working Capital) and Capex.
Formula is: Free Cash Flow = Operation Income (after taxes) - Net Changes in Working Capital - CapEX.
For clarity, let's use the below example:
Operating Income after taxes = 100
Net Change in Working Capital = -25
Capex = 15
1)
a) FCFE = 100 - (-25) - 15 = 110 or b) FCFE = 100 - 25 - 15 = 60
Which would be the correct answer in based on the above example?
2) In case if the above example is changed as below:
Operating Income after taxes = 100
Net Change in Working Capital = 25
Capex = 15
a) FCFE = 100 - 25 - 15 = 60 or b) FCFE = 100 + 25 - 15 = 110
Which would be the correct answer in based on the above example?
Thank you,
Rajan
CAclubindia
